This guide will show you how to build a profitable technology business by quickly learning what … [+]
Building a technology business is unlike building any other business. Startups leverage technology to serve customers at scale. Creating this technology requires a series of validation, iteration, and sometimes complete changes of plan.
The search period that every technology startup goes through to find a scalable and repeatable business model with a product that solves a problem and worthy of customers’ money is what makes building a startup unique.
For decades, the principles, methodologies and approaches used to build non-technology businesses were applied to launch and grow technology startups. In a nutshell, once you understand the market, if you build and promote a solid product, customers will use and pay for it. This approach proved ineffective for technology startups. Findings show that close to 45% of startups fail due to lack of market need.
For startups, the learn-build-promote approach skips the business model search period and assumes that the created solution is valid and worthy of customers’ attention and money. While a few startups sometimes quickly hit the sweet spot, the majority realize a need for major changes in the product or business model. In many cases, lessons learned from product launches suggest a complete change of direction meaning building a different product as if the team is starting from scratch.
A startup will always be evolving no matter how careful the founders are in trying to build a product people love. The goal is to make smaller mistakes especially in the early risky stages. This guide will show you how to build a profitable technology business by quickly learning what customers want and will pay for so that you don’t waste resources in ineffective strategies and solutions.
1. Identify A Need
Ideas are nothing more than proposed solutions to a problem or a need. While there are countless business opportunities, the more urgent the need is for a solution, the more likely a product will be used. The first step is to measure the urgency of an identified need.
- Are people paying for an alternative solution?
- What’s the consequence of not having a solution? Will they lose money, waste time or incapable of getting an important job done?
- Is it an unavoidable problem?
- Are there underrepresented or underserved segments?
Answering those key questions is the first step in evaluating whether your solution is worth creating. The last question can reveal opportunities for differentiation through concentration in which your solution can be customized for a specific group of people even in the existence of large competitors.
This stage is more like an entrepreneur’s homework before interacting with key stakeholders like customers. By the end of this stage, you should be able to write the first version of your value proposition statement: For [customer segment] who is dissatisfied with [drawbacks of existing solutions], our product provides [benefits/differentiation].
2. Validate The Need
Many ideas look great on paper but are not valid in practice. Building and marketing a product is one way of knowing whether the solution is valid. However, this approach is long, costly and the reason many startups fail. Adding a few steps before product development will significantly minimize costs and startup risk. The goal from those steps is to build in response to demand.
A product is created to solve customers’ problems. Therefore, only the customer can tell if there is an urgent need and if they’re willing to pay for a different solution. As such, the first step in validating a need is customer interviews.
The benefits of interviewing potential buyers go beyond gathering insights. Think of your group of interviewees as your mentors, marketers and investors. They’re mentors because they can help you build a product they need. They’re marketers because they can help you spread the word and attract other customers. Finally, they’re investors because they can help you fund the early stages by committing to the solution early on.
You can gather your group of interviewees by leveraging online and offline communities, social media sites, cold outreach, your network or any channel that allows you to connect with your target buyers.
The goal from the interviews is to find consistency in respondents’ answers who should deliberately indicate whether the problem is worth solving or not. If it is, move to the next stage and if not, let your interviewees tell you what need you should be focused on addressing instead.
3. Validate The Solution
It can be tempting to move straight to product development based on interviewees’ indication of a need and request for a solution. In reality, many of the things we say we will do are different from the things we end up doing. In other words, while insights gathered from the interviews should be taken as a strong validation signal, it isn’t until they commit to the solution and use it that we know we have proof. Follow these four steps to quantitatively validate a solution.
1) Chances are, through research and customer interviews, you have a clear idea how the product should look and function. Before building it, design it. As noted earlier, one of the benefits of involving customers since the beginning is their contribution as mentors or guides. Invite a few of your interviewees to review your product designs and help you picture the product they wish they could use.
There are many reasons why you should start with product designs. First, they are quicker to create. Second, every software development project starts with a design phase which means you would have started with it anyways. Finally, designs are great for testing ideas because you can modify them quickly without costly and time-consuming redevelopment.
2) Turn the designs into a clickable prototype. There are many tools that can help you build prototypes even if you don’t have a programming background. The prototype, at this stage, will not be the solution that customers use, it will serve as a presentation tool for the next step.
3) Create and sell a mafia offer. If interviewees collaborated to create the designs and prototype, and if the need is truly valid, there shouldn’t be a reason future users will not be willing to commit financially to an offer that is very hard to resist.
It is common at this stage to see hesitations and objections. It is the moment you learn if future buyers were honestly interested in the solution. Surprisingly, most, if not all, of your interviewees will want to pass. For instance, in one of my first startup ventures, out of close to 500 interviewees who deliberately asked for a solution, only three paid. Had I built the product before selling the offer, I would have wasted tens of thousands of dollars.
4) In many cases, especially in a market with many alternative options, future buyers will prefer a functional product before committing to it. In this case, the fastest way to serve customers without necessarily spending the next few months turning the designs into a functional product is by creating a non-scalable solution delivery process.
It is a solution that combines existing tools and manual work to get customers’ job done. You may be familiar with the story of Airbnb where the founders used their own apartments and air mattresses to serve guests. Even after validating the need, the founders continued to hustle in connecting guests with hosts before building a powerful online and mobile matching platform. The founders of the food on-demand startup, DoorDash, followed a similar process in the early stages before building an app.
Those 4 solution validation steps will provide you with all the insights you need to build a product people are more likely to use. Best of all, you can accomplish all of the above in as little as one month. In fact, when the founders of DoorDash realized they were trying to solve the wrong problem, it took them one afternoon to iterate and get their first food order. They used a simple landing page, their cell phones and vehicle to take and deliver the orders.
4. Build Core Features
Having validated the need and solution, it is time to build your app idea. As noted earlier, one of the benefits of testing the validity of the solution with product designs is presenting a visual and interactive version of the product before it’s built. This is key to the development phase since by now, the features and visuals should have been adjusted and prepared for development based on customer insights and feedback.
One of the costly mistakes founders make at this stage is build an advanced product before quantitatively validating the core features. Those are essential features for delivering the value proposition of the solution. In other words, users will not be able to get their job done without them.
If users do not see value in core features, chances are good-to-have features will not make a difference. Therefore, it is wiser and safer to start by building and quickly testing the core features of the product.
If you don’t have a programming background or a technical co-founder, you need a team to help you build the product. With today’s freelancing platforms, it is easy to find people with complementary skills.
Turning an app idea into a product people use is unlike building any other software product. Prioritize working with entrepreneurial freelancers. Those are talents who have startup projects of their own and understand what it is like to build a startup. Best of all, they can potentially become your co-founders.
5. Test Riskiest Assumptions
While earlier stages seek to find problem/solution fit, this stage focuses on product/solution fit which essentially is how well you turn the proposed solution into a useful product. The riskiest assumption is people using the core features to get a certain benefit.
Key metrics like churn rate, user growth and customer lifetime value help in measuring the impact of the product in solving the identified problem. More importantly, the insights gathered from customer interviews will help you connect the dots to make educated conclusions about the product and the next steps.
6. Invest In Customer Acquisition
Entrepreneurs are encouraged to start building an audience as soon as possible, even before identifying a need in the market. Starting with an audience means having a group of people that can provide insights, invest in your idea through presales, refer others and more.
There are many channels that can help you build an audience. Some of them include writing articles, producing a podcast, launching events and actively engaging on social media. For instance, the founders of the social media management platform, Buffer, were able to build a growing audience of future users by actively writing blog and guest posts before launching the product.
Your main acquisition channel will depend on the product and target buyer. It’s important, at this stage, to at least start setting up the foundation of a repeatable acquisition channel whether it is content marketing, cold outreach, paid ads or others.
A startup can have a solid product with paying customers and yet, fail to validate a business model at scale. For instance, if the cost of acquiring customers is higher than the return generated from retaining them, the business is operating at a loss.
With validated core features, the next step is to progressively improve the product by providing users with all the needed tools so that they stay longer or use it more often and refer others, thus increasing customer lifetime value and reducing customer acquisition cost.
Shortening performance evaluation cycles is how a startup can continue to test ideas of new features or initiatives quickly. Learn from the data, prioritize features, measure performance and start again with new additions.
In conclusion, to build a profitable technology business,
- Find out if there is an urgent need for a solution by studying the competition and talking to future buyers.
- Validate a solution by involving the customer in product designs, seeking their commitment and serving them by doing things that don’t scale.
- Build and validate the core features of the product; features that are essential to users’ ability to address the validated need.
- Set the foundation of an acquisition funnel to build a predictable revenue channel.
- Continue to improve the product as you gather and analyze data to enhance user experience and differentiate it from the competition.